The EU-UK Trade Agreement – first impressions (2) Title VIII Energy

The European Union has been attempting to build a single energy market for over two decades based on liberalised markets for both electricity and gas.  This started with the First Energy Package for electricity approved in 1996.  Britain had started the process earlier and by the end of 1990 had privatised the 12 regional electricity companies.  Far from the big bad EU pushing privatisation it was Britain that led the way, continuing to have a major influence on EU energy policy as a member state.

By looking at the Energy section of the new EU-UK Trade and Cooperation Agreement we can see characteristics that are repeated throughout the Agreement and illustrate the wider issues that it contains.

Reading Title XVIII Energy of the Agreement is like reading the Directives of the EU’s Third Energy Package, without the detailed rules but with the same principles agreed by the two Parties.  So, we have agreement to “competition in markets and non-discrimination”; with wholesale electricity and natural gas prices that “reflect actual supply and demand”; rules that “encourage free price formation”; and services that “are procured in a transparent, market-based manner.”

The EU also claims that it has agreement to “enforceable commitments towards Paris Agreement and non-regression on climate change and carbon pricing, with possibility of linking EU and UK carbon pricing regimes.”

Since the energy sector is heavily regulated and of strategic importance the Agreement permits heavy state intervention so that the commitment to free markets is heavily qualified, something that the most extreme libertarian advocates of capitalism might bristle at and left supporters of Brexit fail to appreciate.

For example, one of the sections (Article ENER.8) on ‘Third-party access to transmission and distribution networks’ repeats the EU requirement that “Each Party shall implement arrangements for transmission system operators which are effective in removing any conflicts of interest arising as a result of the same person exercising control over a transmission system operator and a producer or supplier.”

The EU recognises that while there can be ‘competitive’ markets in electricity generation between different companies, and in electricity supply to final domestic and business customers, there can only be one provider of the transmission system of high voltage overhead power lines and associated equipment.  In order to prevent the transmission system owner in the middle of the industry discriminating against particular generators or suppliers from rival companies, these transmission system owners have to be ‘unbundled’ from any joint ownership of generation and supply.

In order to protect the ownership structure of Scottish companies the UK as a member state had the rules elaborated to protect ownership structures that on the face of it looked incompatible with separate ownership requirements and removal of any potential conflict of interest.  This was an example, noted earlier, of British influence and not the ‘subordination’ claimed by some supporters of Brexit that we noted in the previous post.  In practice also, the transmission system operators mostly remained state-owned across Europe.

How far the rules could be bent is best illustrated in Ireland where the largest generation company is owned by the Irish State; as is the largest supply company, while the transmission system (and distribution system of low voltage wires) is also owned by the Irish State.  Not only that, but the Irish State also owns generation in the North of Ireland, a supply company and the transmission and distribution systems as well.  It also owns the undersea cables (interconnector) joining the Irish electricity grid to the one in Britain.

Some states regard such assets as strategic and are keen to retain ownership.  What this does is make a nonsense of the view that the EU is somehow a more ‘neoliberal’ creature than Britain, but also that state ownership is somehow socialist.  The Irish State has never had a social-democratic Party in office without it being the junior partner of the traditionally most right-wing capitalist party in it, yet ownership of the electricity industry in the Irish state is dominated by that state.  Something the Irish supporters of Brexit seem utterly oblivious to.

State intervention obviously gives rise to concern about unfair competition but given that both sides subsidise renewable generation this will be a hard area to police, making it another potential area for conflict – “each Party preserves the right to adopt, maintain and enforce measures necessary to pursue legitimate public policy objectives . . .”

In the body of the Agreement and Annex ENER-2 ‘Energy and Environmental Subsidies’ there are numerous references to the need not to “significantly distort trade between the parties”, and that subsidies generally “shall be determined by means of a transparent, non-discriminatory and effective competitive process.”

This includes that “a Party shall not impose a higher price for exports of energy goods or raw materials to the other Party than the price charged for those energy goods or raw materials when destined for the domestic market . . .”

The existence and further development of undersea cables (interconnectors) joining the electricity grids of different countries is the foundation of the single European Energy market that Britain has left.  It is testament to what Marxists have analysed as the Internationalisation of the forces of production and upon which the socialisation of production will form the basis of international socialism.  Their existing development under capitalism imposes its own requirements regardless of reactionary political moves to limit or reverse the process.

The Agreement is therefore keen that the maximum level of the capacity of electricity interconnectors is made available (as also for gas interconnectors).  This is the case if for no other reason than, for example, the electricity interconnectors between Britain and France and Britain and the Netherlands are jointly owned by the British and French and the British and Dutch.  Brexit should therefore not prevent this process of interconnector development from continuing. (See here for a current list of existing and projected interconnection).

This requires continuing cooperation between the EU and UK even as the latter leaves the EU’s Single Energy Market.  Cooperation between the energy Regulators and the transmission system operators will continue although the EU is clear that this does not accord the UK partner equivalence to their own in either case.  In the case of the “administrative arrangements” between the GB and EU Regulatory Authorities, the Agreement states that it “shall not involve, or confer a status comparable to, participation in the [EU’s] Agency for the Cooperation of Energy Regulators by the regulatory authority in the United Kingdom.”  The cooperation nevertheless requires new provisions and rules for trading across the interconnectors joining the EU and Britain.

The main market for trading electricity in the EU is the Day-Ahead market in which hourly electricity flows are priced in an auction involving generators selling and suppliers buying power at the clearing price set by the auction.  This involves generation and supply companies right across the EU with the price calculated by an EU algorithm.  Because of restrictions in the flow of electricity across different countries a single price across Europe isn’t possible but the price differences that arise between different zones determines the direction in which electricity flows across the interconnectors between them.

So, for example, if the price in Britain is €60 and the price in France is €50 the flow of electricity would be to Britain, which would lower the price there and permit export from France and would be an efficient use of the interconnection.

The Agreement’s new arrangements are set out in an Annex (ENER-4):

“the Specialised Committee on Energy, as a matter of priority, shall take the necessary steps . . . to ensure that transmission system operators develop arrangements setting out technical procedures in accordance with Annex ENER-4 within a specific timeline.”

“If the Specialised Committee on Energy does not recommend that the Parties implement such technical procedures in accordance with Article ENER.19(4) . . .  it shall take decisions and make recommendations as necessary for electricity interconnector capacity to be allocated at the day-ahead market timeframe in accordance with Annex ENER-4.”

Which seems to say the Specialised Committee (made up of representatives of the EU and UK) can implement the new arrangements as set out in the Annex, and if it doesn’t agree to them, it can implement them anyway.

These arrangements envisage an auction involving the UK and those EU countries directly connected to the UK by interconnectors, before the EU Single Market Day-Ahead auction.  The results of it would be an input into the EU auction calculations.  The EU Day-Ahead auction closes at 12:00 and produces results for the 24 hours beginning 24:00 on the same day (all times are Central European Time i.e. one hour before UK time).

The newly mandated EU-UK auction would therefore have to be completed well before 12:00 and would not contain more up-to-date information on demand, the weather and power plant availability etc. which may thereby make it less attractive to potential participants.  In these circumstances the prices coming out of it may result in less efficient prices so that the interconnectors directly joining the UK with the other parts of the EU may not flow in the ‘correct’ direction.

In our example above, if, in the EU Day-Ahead auction, the price in Britain was €60 and the price in France was €50 the flow of electricity mandated by the earlier auction might be to France, which would lower the price there and permit export from Britain but would take electricity from where it is relatively expensive to where it is already relatively cheaper, exaggerating the price differences instead of bringing them together.  This would therefore not be an efficient use of the interconnectors.

This of course would affect both Britain and EU countries and would be sub-optimal for both but it is also the case that Britain would suffer proportionately more.  Another example of where exit from the EU may cause harm.

In looking in more detail at one area of the Trade Agreement we can see the stupidity of Brexit even from the narrow point of view of British capitalism.  This includes the left supporters of Brexit whose equally narrow nationalist claims are also unjustified as we have seen.  From a socialist point of view, while it undermines any genuine objective of international socialism Brexit also undermines its left supporters actual project of reforming capitalism through prioritising the nation state and its so-called ‘sovereignty’.

The EU-UK Trade Agreement – first impressions (1)

Thinking about the new trade agreement between the EU and UK I was remined of the words of Michael Corleone in the Godfather 2 – “keep your friends close but your enemies closer.”  And just like the film, the enemies speak of each other with admiration and respect, as forming a partnership, in coming together for what the EU describes as a ‘balanced’ agreement.

Of course, we can take this analogy too far: the EU and UK are not Mafia families.  Let us not be too hard or too soft on notorious enterprises engaged in legitimate business as well as activities that can only be described as criminal from any objective and moral viewpoint.

As a free and ‘sovereign’ power the British will have to do something with their newly found freedom and power, even if it only draws attention to newly discovered limits to both.  As I noted in the previous post – there will be no ‘moving on’ from Brexit, something noted in the European press.

In that post I noted that the EU would be going nowhere and the British would have to deal with it and the constraints it will impose.  Whatever admixture of rivalry and partnership arises following the Agreement it will not be a rivalry and partnership of equals.  The agreement shows that this is also true for the EU – Britain will still be there, as a rival and partner – and the Agreement leaves open the paths for both.  It has registered the relative balance of power between the EU with (roughly) a population of almost 448 million and GDP of €13.5 trillion, and that of Britain with 67 million and €2.5 trillion.

What is noteworthy is just how much has still to be agreed, from acceptance of the UK’s data adequacy; to services, including financial services; recognition of qualifications and much else.  In the next post I will look at the section on Energy that illustrates the extent of this, of what Brexit has torn up and now has to be replaced.

In the meantime the Tory Government and Tory press will sing the praises of an agreement that means that Britain will no longer benefit from free movement of goods, leading to more red tape for businesses; to customs formalities and checks on goods entering the EU, with more border delays; for food exports that require valid health certificates and systematic (phyto-)sanitary border checks, and companies wanting to supply both EU and UK markets having to meet two sets of standards and regulations while fulfilling all applicable compliance checks by EU bodies (with no equivalence of conformity assessment that would allow this to be done in and by the UK).

It will therefore probably take some time for the enormity of the losses to sink in, and for many Brexit supporters it never will; there will always be someone (foreign) to blame.  It is perhaps therefore not surprising to see even the most sober and informed supporters of Brexit exaggerate the potential role of Britain out on its own.

So we see this: “The most immediate conversations will be over what we have in this deal compared with what came before. To what extent will the UK be able to continue exporting services and which authorisations are still valid. These are matters of immediate economic importance, but less important than the overall implications whereby Britain and Brussels have shifted the regulatory focus from Brussels to Geneva, where the UK may enlist the support of its allies and fellow EU FTA holders to bring pressure to bear on the EU.”

“The longer term implications of this means the EU weakens its grip on technical governance to become more of a political and monetary union, the type that Britain could never be part of. We wish them the very best in their endeavours and look forward to working with them, but in international organisations we shall sit as sovereign equals rather than subordinates.”

Except of course that the idea that Britain was a subordinate in the EU is a myth.  The Single Market the Brexiteers have been so keen to leave is an example of the influence Britain has had, as was the enlargement of the EU after the fall of the Berlin Wall.  British influence could also be seen in EU policy on Energy, which I will look at in more detail.

A summary evaluation of the Agreement by the same Brexit supporters is that:

“It is one, also, which keeps the UK closer to the EU globally-based trading system than anyone could possibly have imagined at the outset of negotiations. It is one of considerable depth which creates a framework for a relationship which, if explored by people of far more diligence than Johnson and his cronies, could eventually be turned into a useful working agreement, albeit at savage cost to the UK in the interim.”

This “framework” within the Agreement, to be deployed for developing future relationships, includes “a Partnership Council, 19 specialised committees and four working groups which will no doubt be expanded over time.”

Their summary goes on to state that:

“The economic cost of that [Agreement] will be considerable and it will take two years at least to get the ball rolling through the various committees. A lot of work has to be done to rebuild trust and confidence between the parties, where the EU has to get the measure of Brexit Britain’s intentions and behaviour.”

“In this, one gets a sense that certain pennies have dropped. No doubt the election of Biden poured cold water on a number of transatlantic ideas and the UK is reassessing its global strategy, perhaps realising that the EU still matters as a trading partner. If there is a change in tone and attitude, the process of rebuilding will be faster.”

“This will no doubt leave remainers puzzling as to why we would go through such an enormous bureaucratic exercise to accomplish what amounts to very little at enormous cost. This is a dispute where remainers and leavers will never see eye to eye. This exercise is a switch from supranationalism to intergovernmentalism, broadening our horizons beyond Brussels, recognising that Britain was never an enthusiastic member of the EU and would always have to disembark before it reached its final destination – whatever that may be.”

“Brexit will never satisfy the eurosceptic fundamentalists because reality simply cannot oblige their definition of sovereignty, and though we may sit as sovereign equals in international forums, we do not sit as power equals. If we are to accomplish anything internationally we will need to build partnerships and alliances of like-minded nations, not least because the problems and threats we face in this century are far beyond the capacity of any country acting alone. Leavers just believe cooperation can happen without political subordination.”

The problem here of course is that partnerships and alliances have to have an objective and for that you need to identify your potential allies.  This would normally be those who are closest to you and with whom you trade most, but this is the EU and Brexit is all about tearing this alliance up.  So who are your future allies?

In the past Britain has used its power to seek allies in Europe and to divide its continental powers to prevent their unity.  However Brexit, far from dividing the EU, has united it by illustrating the price to be paid for leaving.  The only two other allies with near equivalent weight in the world is the US and China.  The former wouldn’t tolerate any real alliance with the latter, even if it made sense, and the former is, like every great power, interested in itself.  As one contributor to the discussion on the Brexit site noted – Britain won’t be at the table as an independent player, it will be on the table as part of the menu.  In any case any such alliance would render the just-signed Agreement redundant, which Johnson of course is quite capable of doing, as we have already seen.

These relatively sensible, if reactionary, Brexit supporters seem to envisage an ‘independent’ Britain forming ad hoc alliances with whomever Britain might seem aligned with at any particular moment.  This might be credible if the issues they might align on were also ad hoc and not themselves systematically defined.  The route of opportunist alliances has the potential for Britain to become a sort of rogue state, a deregulated offshore dump for the world’s criminals and partner for the world’s most disreputable regimes.  These supporters of Brexit therefore misunderstand both the nature of interests and of the particular interest of Britain.

They are however far and clear-sighted compared to Sir Keir Starmer who believes he can support the Government and not share the blame; not share in the opprobrium of Brexit that the majority of his party’s members and voters have for it.

If the process of getting to a deal has proved tortuous this will be as nothing compared to the torture of its effects.  When asked whether he was supporting something that would make people poorer Starmer avoided the question; but as the old saying goes – he may avoid it but it will not avoid him.

If, as it appears, his only justification is that the alternative of a no-deal is worse then he should oppose the rotten and false choice that the Government alone is responsible for.  By voting for it, on the other hand, he will join himself to this responsibility.  He claims to be giving leadership, but he is supposed to be the leader of the Opposition and leadership of the Opposition requires . . . guess what?

Once again, he has shown himself to be a smart lawyer and stupid politician, even when judged by the narrow electoralist criteria that appear to motivate him.  He will assume that progressive Labour supporters will have nowhere to go, without considering that this might include nowhere near a ballot box.

Brexit has been toxic to everything it touches, as it continues to move on it looks like another casualty of it could be the Labour Party.